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Florida was one of the first states in which real estate began its meltdown. It is not surprising, therefore, that Christopher Hurn, president, CEO and co-founder of real estate lender Mercantile Commercial Capital, in Altamonte Springs, FL., has seen significant reductions in the price of many commercial assets. Even Hurn, though, was taken aback by the recent price discount on one condo development in Orlando. “The developer slashed prices by $110 per sf — from $390 to $280 per sf.” The building began development in late 2006 — not quite the height of the market but still high enough to allow for a sharp fall. “Even taking that into consideration,” Hurn says, “a $110 per sf cut in price is a significant drop.”

Hurn handles mostly small business owners and owner-occupied buildings. Still, his observations of price decreases, which he says are now common in these submarkets, is a sign that some sellers at least are beginning to accept that the capital market has up-ended price dynamics for likely a very long time.

Not all sellers though. A series of interviews conducted by GlobeSt.com show that buyer-seller expectations about price range across the board from acceptance of the new investment climate to furious refusal to budge from 2006 valuations. This standoff between buyers and sellers quickly became apparent in Q4 when investment sales dramatically slowed – a decline that was only partially attributed to new underwriting standards. Consider the Washington, DC market, a market that receives more aggressive underwriting than most. In Q1 2008, office investment sales in the DC metro area equaled some $520.8 million–down from Q4 2007′s $2 billion sales, according to figures from GVA Advantis.

Doug Snyder, a partner with Cox Castle & Nicholson in Los Angeles, for instance, thinks because sales have been so limited, more time will have to pass before we get a true sense of where price points have settled. “I don’t think that CRE sellers are expecting prices to return to 2006-07 highs in order to sell, he tells GlobeSt.com. “However, based on the limited number of commercial sales we have seen since mid-2007 compared to recent years, there clearly remains a gap between the bid and ask values in the minds of buyers and sellers. As the credit markets recover, we should see more transactions and have a better idea where the market really is in 2008.”

In some markets, as more transactions close, it does appear as though sellers are letting properties trade at lower price points. It takes a period of time for sellers to adapt, Daniel Herrold, director with Stan Johnson Co., in Tulsa, OK, tells GlobeSt.com. “But we are starting to see that happening now. Our clients are adjusting expectations.” His view of the market might be a little lopsided though, he continues. “We are probably seeing a lot more price concessions because there is not a prevalence of good product in marketplace.”

Still, though, other markets report that there is still a huge gap between buyer and seller expectations. Steve Chaben, first VP in Marcus & Millichap’s Detroit and Grand Rapids Offices, tells GlobeSt.com that he has not yet seen prices drop in the commercial real estate market. “Instead, there has been slowed activity and a widening gap between seller and buyer expectations. Property owners are reluctant to conform to the buyers’ market and are tending to hold assets rather than sell them.”

Rick Takach, president of Vesta Hospitality Group, a hotel investment firm in Vancouver, WA., tells GlobeSt.com that hotel valuations are down between 10% to 30% — and as a result there is not a lot of product for sale. Right now he has a bid on a hotel in Oregon which he has priced according to what he believes will be its five year internal rate of return. “I am not sure if the sellers understand how I am underwriting it and how I came up with the price.” Underwriting hotels based on 10% to 12% RevPar is a thing of the past, he adds.

The only sellers that are realistically pricing right now are those that are under pressure to sell, Aik Hong Tan, president of Richfield Hospitality, a hotel investment and management firm in Greenwood Village, CO., tells GlobeSt.com. “Either they have to refinance or they are being asked to do a major renovation to the property and they don’t have the funds to do that.” Cap rates are up 50 to 100 basis points from what they were nine months ago, he adds. These observations, though, do not necessarily apply in major cities like New York or other markets where there are very high barriers to entry, he says.

The location of the asset has become more important than ever in financing – and thus pricing – agrees Duke Runnels, president and CEO of FORT Properties, a Section 1031 sponsor and real estate investment firm in Los Angeles. “The CMBS market was not a discriminator of location,” he tells GlobeSt.com. Today, though, because financing is done largely through local banks, life insurance companies and other funds, underwriting is more thorough. “A property in small submarket that is the same size, same class, same tenant quality and even has the same rents as one in a big city will be valued differently.”

For John Coleman, SVP of the Skokie, IL-based Alter Group’s Asset Management division, quality of asset is what he sees as the key differentiator in pricing. “The quality opportunities are untouched by the downturn because their fundamental characteristics– good credit tenancies, rental rates, minimal leasing risk – are somewhat more resistant to the softening dynamics in the marketplace,” he tells GlobeSt.com.

“We have not seen much price erosion, because the better quality assets have proven that they hold their value in the face of a downtown. We’re instead seeing price deflation on borderline deals. For example, prices are coming down in the higher risk product types, such as class B suburban office types with 20% vacancy or greater. Buyers are much less inclined to give those borderline opportunities the benefit of the doubt.”

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